“For 18 years I have resisted talking about current events. I am not going to start now.” -George H.W. Bush
Fun fact: only two US Presidents have served in office while over 80 years old. If you don’t know who they are, you may (and should) fail your current events quiz. Given the leadership over the past decade, quotes from past US presidents now serve as reminders that the POTUS role was typically filled by younger men (i.e., literally every other time in our country’s history). While I don’t know if octogenarian presidents will continue to be the new normal, it is currently the case, and current events are what we’ll cover in Part 3 of our Alts Updates series – perhaps to the chagrin of George Bush Sr.
As a quick refresher, Part 1 discussed extension/continuation funds and other Alts structures, along with Crypto indexes, while Part 2 touched on the growing limited capacity (paradox?) for Alts due diligence, international payments on the blockchain, and AI agents. Today, we’ll round out this series on the latest happenings in Alts, and I promise it will include a dose of private market perspective. Here we go!
Party like you’re related
There’s been some recent press about Mark Walter, who is the controlling owner of the LA Dodgers (but also recently sold the LA Lakers and owns the Chelsea Football Club; h/t to TBG’s John Fincher for bringing this to my attention). At the center of the investigation are “related-party transactions.” The LA Times article astutely (or alarmingly) points out that these structures were vital components of both the Enron and Madoff scandals. Yet, while that’s technically true, this situation strikes me more as Walter using various entities – like insurance companies he also owns – to potentially obtain favorable financing terms. If so, that would be a big no-no, and he should be held accountable, but unless he’s illegally drained billions of the insurance companies’ assets and hung investors/policyholders out to dry, a comparison to some of the worst financial crimes in history is probably (wildly) unwarranted.
That said, related-party transactions aren’t uncommon, and the story serves as a good reminder of the role these have within the Alts world. In general, it’s a good idea (and perhaps required) to have disinterested third parties involved in valuations and deal terms. Using continuation funds as an example, a private equity sponsor may take seasoned investments from funds they already manage and then repackage them into a new fund they will also manage. Since those are related parties, and the transaction won’t occur on the open market, it is vitally important to be as transparent as possible, using (multiple) disinterested third parties to arrive at the valuations for the deal (i.e., the sale/purchase price of the assets from the old funds into the new fund).
And what if you’re really related?
It’s common that family members loan money to one another. In our role as advisors, it is common for parents to help their children with loans for property purchases. No legal advice here, but – if the goal is to create a defensible loan – we also often see the use of (very straightforward) documents outlining the loan terms and use of applicable federal rates (AFRs). In other words, you can’t go handing out “loans” to friends or family at zero percent interest and expecting these to be regarded as legitimate loans in the eyes of the tax authorities.
Can’t stop, won’t stop
Private credit headlines aside, articles like this still try to disparage private investments in general. Who knew you’d have to pay taxes on income and gains on private investments? Seriously, the article implies that because you can punt a large portion of capital gains in low-yielding public investments (like many equity-index ETFs), you somehow avoid taxation. Well then, how about investing in venture capital that doesn’t produce any recognizable gain for 15 years? Is that then even better? Tax deferral is not tax avoidance, and it may actually work against you (see Chapter 7 of David Bahnsen’s new Profit from the Profit book!).
It also compares an alts-heavy endowment portfolio vs. public markets during one of the greatest public-market runs in history to make the case against private investing. Cherry-picking is fun, but it’s a terrible way to make investment decisions. I will agree that getting a K-1 citing substantial realized gains while your investment has actually lost value is not fun (I’ve seen this with hedge funds that trade a lot), but this is yet another example of an article heavy on finger-pointing and light on the nuances and pragmatic realities of investing. For those who aren’t aware: asset location (the ownership and tax structures in which investments are held) is a vital part of prudent investing, and taxation is but one attribute to consider for each piece of an investment strategy.
Private Credit, of course
Hat tip to our friend Harry K. for passing these headlines along, as they are worth discussing; these things can legitimately frighten people, regardless of how misleading they can be.
When the headline is “Private Credit is Under Growing Strain, Despite Industry’s Upbeat Tone,” there’s clearly an agenda the author has in mind – and that agenda isn’t going to be advocating for private credit investments. Still, I found it to be a relatively fair article until the last section (“Where’s the beef?”). Should we be concerned by findings like “Private-credit funds routinely delivered annual returns of 10% or more…[but] now, even the stronger funds are struggling to deliver 7%”? What if we compare those “problematic” results to high-quality public bonds that have had negative returns for the past 5 years? (Source: Tamarac, Bloomberg US Corp IG Index, 9/10/26).
To recap: I could have gotten high-single-digit annualized returns for 5 years (I’ll round that to about 50% total return) or zero return? By the way, have you seen any articles about how people holding too many public bonds (and being too conservative) over the past 5 years have had to draw down their portfolios and potentially decimated their retirements? Me neither. But here’s another article by the same author echoing his own thoughts, in the exhausting supply of very important alarmist private credit headlines. You be the judge, but it sure seems like private credit investors are sitting pretty and can afford to absorb some losses or withstand years of mid-single-digit returns.
If you’re “doing” private credit / direct lending correctly, these direct loans should be mainly senior-secured (first in line to get paid), with floating rates, limited durations, reasonable loan-to-value, and other vital underwriting provisions. That is all important for risk management. The other bone I have to pick with this article is that the returns chart isn’t for actual private credit investments; it’s for listed BDCs (aka publicly traded business-development companies) that hold private loans. The pricing of public BDCs can be heavily influenced by trading and investor sentiment, just like all other publicly traded investments. Thus, these funds trading at a 30% discount to the net asset value (NAV) of the loans doesn’t tell you a lot about the loans themselves.
To avoid any confusion: public bonds and private credit are two very different things. Both are useful for different purposes and should be incorporated into portfolios appropriately. Also, there are still certainly major private credit funds gating outflows; but that restricted liquidity is a protection mechanism that we want and need. It is not news nor reason for concern. Know what you own and why you own it, always and forever.
All good things
I’ve exceeded my allotted length already, so we will leave it there to close out this series on just some of the latest happenings in the Alts world.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
